Small Cap Value Report (10 Dec) - John Lee, SEA, ZYT, SEE

Good morning. I'm writing this first bit early, at 1 a.m., to jot down a few thoughts after this evening's Mello investor evening in Beckenham. It must have been the best attended Mello ever, with about 75 investors descending on Sea Salt restaurant in Beckenham tonight, right by the railway station, just 20 mins from Victoria.

The star of the evening was John Lee, Britain's first ISA millionaire, a veteran investor, and a politician. To my shame, I've not come across him before, but listening to him speak was an absolute treat - literally every well-crafted sentence was a pearl of investing wisdom. When you listen to really successful, experienced value investors, they don't really tell you anything new - instead they charge you up again with common sense, like a flat rechargeable battery is brought back to life from plugging it into the mains.

John kindly signed copies of his new book, "How To Make A Million - Slowly", and I was particularly thrilled to receive a copy where he accidentally mis-spelt "successfull" with two "l"'s, so I quipped that it would be worth far more when I chose to sell it on Ebay due to the error! All in good humour.

We were then treated to a masterclass in value investing from Mr Lee, and to get a flavour for what he talked about, here is a link to a newspaper article.

Next, we had a presentation from an interesting little stock that I hold a few of, called Seaenergy (LON:SEA).

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Now I don't want to sound critical, but if I'm honest, the presentation was a bit of a muddle. When introducing a company, an investor presentation needs to have a logical flow. It should go something like this;

This is who we are - name, ticker, share price, no. shares in issue, market cap, key management.

This is what we do - in really simple terms that everyone can understand.

The investment case - explain the valuation amp; performance.

The future - tell us why we should get excited about future growth.

Also, in a large room, with a lot of background noise from kitchen equipment, staff who need to prepare our food amp; drink, etc, you need to take control, and speak up amp; project your voice to the back of the room! People need to be able to hear clearly what you're saying.

What actually happened in this case was a confusing description of the business, that seemed to jump about from one confusing slide to another. There seemed to be all sorts of different activities - one minute we were being shown a video about a hydraulic platform that helped get people on amp; off wind farms safely. Next, we saw a ship which cost $50m (are they intending to buy it, or not?), then we saw software that is used on oil rigs to catalogue the site amp; ties in with maintenance records. All great stuff, but it wasn't put into any context. What I would have liked to see was how turnover split amongst these various activities, and how profits/losses are being incurred.

Then there were the legacy assets, which again were not put in context. I asked what the market value of SEA's shareholding in another company called Lansdowne Oil amp; Gas (LON:LOGP) was worth, and it seems to be about two thirds of SEA's entire market cap! Plus there are other legacy assets too. This all needs to be set out on a slide, not coaxed out of management - it's material to the valuation.

So my overall impression is that SEA need to probably go back to the drawing board and start again with a blank piece of paper, as this just didn't work in terms of an investor presentation. But that's fine - we like value at Mello, and as far as I'm concerned, I think SEA could be an exciting investment, so if they haven't worked out how to present it to other investors coherently yet, then that might give me an investing edge?

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All too often I think that management of smaller companies are so wrapped up in the detail of what they do, that they're not very good at describing the business in simple terms to outsiders. Which is fine. As John Lee explained, investing is all about putting the pieces of a puzzle together, and making an overall judgement.

As I see it, if the R2S subsidiary of SEA is anywhere near as exciting as it sounds, then presentational issues will be the least of our worries in the future. I think they could have quite an exciting business on their hands here - R2S is a software business that makes a 360 degree photographic map of any facility (e.g. an oil rig) and then makes that available remotely on a computer - so that staff can familiarise themselves with every tiny detail of a site before visiting it. The benefit of this product is glaringly obvious, when you see a demo of it.

(also the last thing I want to do is undermine anyone's self confidence, as I've done a presentation at Mello myself, and know how nerve-wracking it is. But equally, feedback has to be honest, as that drives improvement. If readers think this is too critical, then say so, and I'll tone it down a bit. Actually, I'm feeling a bit crabby, as I mis-heard the announcer on my train home, and instead of getting off at London Bridge amp; making my way to my pied-a-terre in Islington, I leapt off the train at South Bermondsey accidentally, and ended up stranded there, as all the trains had stopped. So had to catch a bus to Waterloo and then get a cab back up to Angel. What a mess. So thought I'd put my recollections part of the morning report to bed now, and then rely on a Reggie Perrin rail excuse in the morning for late filing - what about 19 minutes late Joan, feta cheese on the line at Beckenham Junction? Or 12 minutes late Joan, confused man with book at South Bermondsey?!)

(to be continued...

Ah good morning! Running slightly late this morning, frozen points at Dalston Junction.

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It's another quiet day for results amp; trading statements. The main one I shall be thinking about is bespoke touch-sensitive screens manufacturer Zytronic (LON:ZYT). Indeed, I shall be popping into town shortly to demolish a large plate of sandwiches under the guise of listening to a results presentation from management! So if you have any concise, pertinent questions (no multi-parters please!) then feel free to put them in the comments section below, and I will try to ask them amp; report back with the answer. I like being a conduit for information amp; views between companies and investors.

I'm very surprised that the share price has dropped 16p this morning to 193p, as the results are as expected - the usual case of punters not doing their research, but just buying on an IC or Shares tip probably? It's a recovery situation, with a strong Balance Sheet, and very good dividend - the total divis for the year are up 7.1% to 9.1p - that's a yield of 4.7%!

EPS has come in (on an adjusted basis) of 13.9p, but that's well down on last year, as they've had a bad year (as has been well flagged before) due essentially to gaps in the order book - always the risk with this type of company, that is dependent on individual contracts. However, if the company is fundamentally sound, then in my opinion that type of short term disappointment presents a buying opportunity.

So the PER is 13.9, and they should deliver better EPS this year. I do enjoy Balance Sheets with net cash on them, and this is a lovely example - with £5.5m net cash, a material sum compared with the market cap of about £30m.

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The outlook statement seems slightly oddly worded to me, maybe this has spooked one or two investors? It's a very illiquid share, so who knows? Overall though it looks fine to me, but I'll report back after seeing management over lunch.

The potential upside here comes from new products in development, including very large, and curved touch screens. We will all be buying things soon from huge touch screens in public places that interact with our smartphones as we walk past.

The outlook statement at ZYT says;

The first two months of the current financial year have seen a continuation of the improved margins and order intake experienced in the second half last year, and as long as the benefits from the trend towards touch sensor products continue, performance should improve this year. We shall update shareholders on material developments and progress as appropriate during the year.

So with a fair wind they might be recovering to perhaps 20p EPS (ball park), and if they do, the shares will surely be nearer 300p than 200p?

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From SEA to SEE - Seeing Machines (LON:SEE). This is probably my favourite GARP stock at the moment. Well, I wouldn't have considered the price reasonable if it were at this level last year, but we're in a bull market now, and people are prepared to pay more for exciting growth companies. So one has to adapt accordingly.

What's exciting about SEE is that their technology (which is very sophisticated eye amp; face tracking software) detects when the driver of any vehicle is falling asleep, and sounds an alarm. So far SEE have dominated the market in high-value vehicles used in mines, and have an exclusive partnership with the largest manufacturer, Caterpillar. Now they are moving into other areas - the big ones obviously being trucks and coaches. So today's announcement of a trial with a Dutch coach operator could be potentially game-changing. I hold some shares in this company, and am quietly very excited about the company's potential. Time will tell if it translates into profits amp; dividends, but so far so good.